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At McDonald’s, the Happiest Meal Is Hot Profits

In the last few years, McDonalds has reworked its menu, extended its hours and improved drive-throughs. In the United States, 60 percent of the chains revenue is passed through a window.Credit
Fred R. Conrad/The New York Times

Tinton Falls, N.J.

CHRIS WARD, 23, didn’t go to McDonald’s much because it wasn’t open late enough for after-hours snacks.

Casey Fillian, 32, and her friend Carol Milano, 33, gave up their teenage McDonald’s habit when they became more health-conscious adults.

And Russ Green, 47, wouldn’t go to McDonald’s because, among other things, he thought its food was unhealthy.

Yet here all four of them are, lined up at McDonald’s one recent morning, lured back by new menu items, longer hours and a sparkling new building that includes flat-screen televisions and video games for children.

Mr. Ward says he’s a regular again because his McDonald’s is open until 1 a.m. Ms. Fillian and Ms. Milano, now moms, say they often bring their children to the playroom and feel no guilt serving them apple slices and white-meat Chicken McNuggets. Mr. Green was drawn back in — grudgingly — because McDonald’s lattes are cheaper and more convenient than those at Starbucks.

It wasn’t too long ago that McDonald’s, vilified as making people fat, was written off as irrelevant. Now, six years into a rebound spawned by more appealing food and a less aggressive expansion, McDonald’s seems to have won over some of its most hardened skeptics.

The chain has managed to sustain its momentum even as the economy and the restaurant industry as a whole are struggling. Month after month, McDonald’s has surprised analysts by posting stronger-than-expected sales in the United States and abroad.

As of November, the latest data available, the company had delivered 55 consecutive months of increases in global same-store sales. During a year when the stock market lost a third of its value — its worst performance since the Great Depression — shares of McDonald’s gained nearly 6 percent, making the company one of only two in the Dow Jones industrial average whose share price rose in 2008. (The other was Wal-Mart.)

David Kolpak, an analyst at Victory Capital Management in Cleveland, says he has been recommending McDonald’s stock to investors since 2002, when the chief executive, Jack M. Greenberg, resigned after a tumultuous tenure.

“I’ve been doing this for 18 years, and I’ve never recommended a stock for this long in my life,” Mr. Kolpak said. “It’s been an amazing ride.”

McDonald’s hasn’t silenced nutritional critics; some of its salads come festooned with fried chicken. The economy has also entered such a brutal downturn that the next year is likely to prove difficult for even the strongest and most nimble of companies.

“I was asked if we were recession-proof. And I said: ‘No, we are recession-resistant. I don’t know if we are depression-resistant,’ ” says Jim Skinner, the company’s current chief executive.

Still, here in Tinton Falls, the mood is buoyant. The owner of this franchise, Ken Hullings, says McDonald’s lacked direction when he acquired the store in 1998, so much so that his wife asked him, “Are we in trouble?”

But he says that a relentless focus in recent years on improving store operations and measuring progress has helped the four McDonald’s locations he now owns to thrive.

“It seemed like every other month I was putting something on the menu or taking something off,” he says. “We were looking for that magic bullet, that magic pill. And I think what we realized that it wasn’t just one thing.”

FROM the time when Ray Kroc decided to franchise the McDonald brothers’ fast-food concept in 1955 and transformed the way Americans eat, he preached the motto of quality, service, cleanliness and value. McDonald’s incorporated those goals into its mission statement as it became a ubiquitous purveyor of burgers and shakes.

By the mid-1990s, however, McDonald’s was struggling to find its identity amid a flurry of new competitors and changing consumer tastes. The company careened from one failed idea to another.

It tried to keep pace by offering pizza, toasted deli sandwiches and the Arch Deluxe, a heavily advertised new burger that flopped. It bought into nonburger franchises like Chipotle and Boston Market.

It also tinkered with its menu, no longer toasting the buns, switching pickles and changing the special sauce on Big Macs.

None of it worked.

“There were 14 changes over the years to that sauce, all relatively small,” but cumulatively they took a toll, says Fred L. Turner, one of the company’s first employees, who became the company’s second chief executive, after Mr. Kroc, in 1974, and held that post until 1987. “The food got off track.”

All the while, McDonald’s continued opening new restaurants at a ferocious pace, as many as 2,000 a year. The new stores helped sales, but customer service and cleanliness declined because the company couldn’t hire and train good workers fast enough.

Sales at existing stores, meanwhile, were sluggish and started to decline.

“We got distracted from the most important thing: hot, high-quality food at a great value at the speed and convenience of McDonald’s,” said Mr. Skinner, the chief executive.

John Glass, an analyst at Morgan Stanley, was blunter. “They were just alienating people that wanted to go there, actively dissuading people,” he said, noting the changes to the menu and the fact that McDonald’s stopped grading restaurants on service and cleanliness.

At the same time, McDonald’s increasingly became a target for animal-rights activists, environmentalists and nutritionists, who accused the chain of contributing to the nation’s obesity epidemic with “super size” French fries and sodas as well as Happy Meals that offered the reward of free toys.

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One analyst called Jim Skinner, the C.E.O. of McDonalds, a regular guy who came up through the ranks and understands what moves the business.Credit
Peter Wynn Thompson for The New York Times

That tattered image was beaten down further by the 2001 best-seller “Fast Food Nation.” At the beginning of 2003, McDonald’s suffered its first quarterly loss in history, and its stock was tanking. Yet by the time a popular, and critical, documentary, “Super Size Me,” about McDonald’s came out in 2004, the company’s comeback was already under way.

James R. Cantalupo, a McDonald’s veteran who had led the company’s international expansion, was brought back from retirement during the company’s dark days. He pushed McDonald’s to court more customers in existing restaurants rather than trying to snare them by opening new franchises.

He also helped to write an internal playbook, what McDonald’s now calls its “Plan to Win,” that barely fits on a single sheet of paper — a text that is treated as sacred inside the company. It lays out where McDonald’s wants to be and how it plans to get there, all of this revolving around the “five P’s”: people, products, place, price and promotion.

While the five P’s smack of corny corporate speak, company officials maintain that they profoundly changed the direction of McDonald’s and have given employees — from the chief executive to the store manager — a framework for prioritizing what they do.

For instance, the company’s mission was changed from “being the world’s best quick-service restaurant” to being “our customers’ favorite place and way to eat,” said Larry Light, who was the company’s global chief marketing officer at the time.

That shift in emphasis forced McDonald’s employees to focus on quality, service and restaurant experience rather than simply providing the cheapest, most convenient option to customers.

It also recognized that consumer patterns had changed — more snacking, more drive-through — and McDonald’s needed to adapt.

“Frequency is important, but we wanted people to frequent us because they favor us,” says Mr. Light, who agreed to work at McDonald’s for three years before returning to his consulting business in 2006.

IN the months and years after the Plan to Win was introduced, restaurants were redecorated and in some cases rebuilt. The drive-through, which accounts for 60 percent of the chain’s business in the United States, was reconfigured to become more efficient.

Stores were opened earlier to extend breakfast hours and stayed open longer to capture late-night diners; 34 percent of McDonald’s restaurants in the United States are now open 24 hours a day.

Employee training improved and so did the advertising, which has centered on the successful “I’m Loving It” campaign. Mr. Turner was summoned back from retirement to restore the quality of the core menu.

McDonald’s scrapped its super-size menu and added healthier options like salads and apple slices, which lured moms and got the critics off its back. McNuggets were changed to include only white meat, ending the mystery-meat jokes, and milk was offered in small bottles rather than cartons.

Executives pored over data to determine what consumers were eating and drinking and where McDonald’s could expand to capitalize on changing trends. Beef consumption was flat, but people were eating more chicken, so McDonald’s “went at chicken hard,” said Ralph Alvarez, the company’s president and chief operating officer.

In recent years, it has added a grilled chicken sandwich, wraps with chicken, a Southern-style chicken sandwich and, most recently, chicken for breakfast. Chicken sales at McDonald’s have doubled since 2002, and it now buys more chicken worldwide than beef, Mr. Alvarez said.

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McDonald’s also set about becoming a favorite destination for drinks. For decades, it offered a limited assortment of beverages, and customers typically bought them as an afterthought to a sandwich.

“We sat there saying: ‘There are all these convenience stores and coffee houses that are driven by beverages. We’re missing out,’ ” Mr. Alvarez says.

McDonald’s improved its coffee by buying higher-quality beans, using better equipment and filtering its water. The company even upgraded the cream, which 60 percent of its customers used.

In the two years since McDonald’s introduced premium coffee, sales of drip coffee are up 70 percent, Mr. Alvarez said.

The Plan to Win wasn’t confined to the United States. In foreign markets, McDonald’s largely turned over leadership to native-born employees who had a better feel for local nuances. Europe now accounts for 38 percent of the company’s profit.

Bob Goldin, executive vice president at Technomic, a food industry consulting firm, said the McDonald’s rebound had been singular because of its simplicity: “execute the basics, flawlessly.”

He described the McDonald’s strategy as “three yards and a cloud of dust,” adding that “it’s not revolution stuff.”

Some people argue that a little more revolution on the McDonald’s menu would be welcome.

Kelly D. Brownell, director of the Rudd Center for Food Policy and Obesity at Yale University, says the McDonald’s menu encourages people to eat unhealthy foods because choices like cheeseburgers are so much cheaper than salads, for example.

Nonetheless, he credits the chain as being more responsible than some of its competitors that market megaburgers.

“As fast-food restaurants go, McDonald’s has been pretty progressive,” he says. “If you look at the last five years, McDonald’s has introduced some better foods and resisted the urge to offer bigger burgers.”

But Mr. Brownell still doesn’t consider himself a McDonald’s convert. He maintains that Americans would be better off without it.

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Initially missing out on a beverage boom at convenience stores and coffee shops, McDonalds added the McCafe for speedy lattes and cappuccinos.Credit
Fred R. Conrad/The New York Times

MR. SKINNER, who has been in charge at McDonald’s since November 2004, is not your typical corporate titan, and that may explain why his name isn’t on the short list of celebrity chief executives who are regularly featured on the covers of business magazines (and are now struggling to stay afloat).

He is the son of an Iowa bricklayer and never graduated from college. He began his career at McDonald’s flipping burgers, and he continues to eat there every day, favoring a quarter-pounder with no cheese or condiments. He was named chief executive after one chief died and the successor became ill. (Mr. Cantalupo died of a heart attack in 2004; Charlie Bell of colon cancer, in early 2005.)

In addition, Mr. Skinner, 64, is quick to credit the Plan to Win and his colleagues for his company’s success, at least to a point. He also says the “alignment of the organization” has been a pivotal factor in its success.

“Right people in the right place, and a succession plan,” he said. “It’s the best ever.”

There’s no denying that during Mr. Skinner’s tenure, McDonald’s has posted the best financial results in its history. The stock price has climbed handsomely in recent years; it reached its highest point ever in August: $67 a share. It closed on Friday at $60.07.

Mr. Skinner appears to enjoy mingling with his co-workers, whether in the hallways of the campuslike headquarters, in suburban Chicago, or behind the counter of one of the restaurants.

“Am I in the way?” he asks a cashier, scooting behind a McDonald’s counter for a photo session. “I don’t touch the cash register. I don’t know anything about them.”

Finally positioning himself, he shouts: “How am I doing, people?”

Given the recent track record of McDonald’s, the response is overwhelmingly positive. Mr. Skinner is a low-key and straight-shooting leader who has resisted the temptation to make changes at the company simply to put his own stamp on the job, admirers say.

“I can’t think of anybody in the retail space who has had that kind of run,” says Mr. Goldin at Technomic. “He’s a regular guy who came up through the ranks and understands what moves the business.”

John W. Rogers Jr., a McDonald’s board member since 2003, likens Mr. Skinner to Red Holzman, the New York Knicks coach who won two championships with a collection of superstars.

“To be able to retain that kind of talent and get them to work together as a team takes special leadership skills,” Mr. Rogers says. “He’s created an environment where these guys have been allowed to shine.”

Mr. Skinner, who worked briefly at McDonald’s in high school before joining the Navy, decided to join the chain permanently after a fellow sailor gave him the idea. After he was discharged from the Navy, Mr. Skinner found a job in 1971 as a McDonald’s management trainee.

He rose steadily through the ranks, eventually overseeing operations in Europe and Asia, the Middle East and Africa. He was the company’s vice chairman — at the time one of the top three executive positions — before being named chief executive.

He says restaurant experience is invaluable for McDonald’s executives because they learn the “fear of failure.”

“They know they have to perform,” he says. “You don’t get a bye because you walked in off the street and went to Harvard.”

Mr. Skinner is a strong believer in the Plan to Win. The results of that push are evident in Tinton Falls, where Mr. Hullings, the franchisee, reopened a rebuilt restaurant in September.

It replaced a 36-year-old restaurant — weighed down by a sterile, cafeteria-style décor — with a sleek new building that offers two drive-through lanes, trendy furnishings and lights, wide-screen televisions and Wi-Fi connections.

A new play area in the restaurant features video games and stationary bicycles with video screens.

Mr. Hullings’s new restaurant also includes a machine that cranks out lattes and cappuccinos in 45 seconds at the push of a few buttons — an initiative called McCafe.

Eventually, McDonald’s hopes to add equipment to make smoothies and coolers that offer bottled beverages like sports and energy drinks.

Whereas many of the chain’s recent innovations have been warmly embraced by investors and franchise owners, the McCafe plan has met with some resistance. Some wonder whether the effort could become a costly distraction, perhaps this decade’s Arch Deluxe.

Others say they don’t expect it to be a big hit, or a total failure. “I don’t think it’s a perfect economy for specialty coffee,” says Mr. Glass, the analyst.

Executives at McDonald’s say they remain bullish on the McCafe plan, and so does Mr. Hullings. To date, McCafe has been installed in 6,500 of McDonald’s more than 14,000 stores nationwide. “It will be fine,” Mr. Hullings said. “People will still treat themselves occasionally.”

HE and his bosses are also optimistic about the prospects for 2009, even as the restaurant industry contracts amid closings and bankruptcies. On Thursday, in a further sign of the nation’s economic woes, Wal-Mart — the McDonald’s of retail — reported lower-than-expected same-store sales for December.

Whatever happens in the United States, McDonald’s believes it has enormous opportunities to expand abroad, in places like Eastern and Central Europe. Mr. Alvarez, the company’s president, says that in the United States, McDonald’s can still win the hearts of customers like Mr. Green, the reluctant latte buyer.

Mr. Alvarez noted that some of the early changes in the Plan to Win — better-looking salads, white-meat McNuggets, milk in a bottle — were intended to alter people’s perceptions of McDonald’s and get them back into the store, even if they continued to disparage the chain.

Eventually, the company won people over.

Will lattes do the same thing? Absolutely, says Mr. Alvarez. “The lesson there is, be patient.”